A Look at Financials & Interest Rates

This post started off as a simple one on the Financials, but then riffed along into yield dynamics and the contrary bond play – of a much different kind that the previous one we managed – that is developing. 

In an overwhelmingly net long portfolio (which includes the very large cash position it will continue to keep as the high risk bull market, sans major correction, labors on) I remain short the Financials (via FAZ) pending the daily chart’s status below the SMA 50, and interest rate dynamics.

Now, this thing looks so bearish that it just can’t be, can it? Otherwise every chart jockey on the planet would be short. It’s too damn obvious.

xlf

The bond market is selling the rising interest rate story today, post-jobs. But I think this will affect the Fed not at all because other than today’s knee jerk I don’t think it will affect the bond market. The Fed does not decide much of anything; it looks to the bond market for signals. Right now, the signal is all’s fine on the inflation front. This is an unfriendly picture for Banks and Financials. They want inflation.

tip ief ratio

This is an unfriendly picture for Banks and Financials; they want a rising yield curve (as long as it does not get unwieldy, which it will at some point, due to baked-in excesses in the system compliments of Bernanke’s Fed).

And this is an unfriendly picture to the Banks and Financials, because it means a squeeze on profit margins as they lend out along the curve.

tnx

But once again, here is a forward friendly indicator for the Banks and Financials (courtesy of Sentimentrader). Public: “mmm, gimme summa dem bonds!”

10yr optix

Commercial hedgers: “You can have ’em, dopey… “

10yr hedgers

Those who don’t learn from their mistakes are doomed to repeat them, eh Joe Public? The 30yr’s dynamics, by the way, are also degrading and I wonder if today’s little post-payrolls jerk into bonds will do the trick there. The play is for the dumb money to jerk all-in to bonds again and then just watch interest rates – and potentially, inflationary signals – rise again.

So to wrap this up, I am short the Financials, which are in a crappy looking chart pattern and yet stand to gain when the contrarian play in bonds – very unlike the one we managed several months ago – is ready for prime time. At that point if the markets are holding up the Financials would actually be a ‘buy’.

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